Vertu Motors plc (VTU) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Vertu Motors plc Final Results Investor Presentation. [Operator Instructions] Before we begin, we would like to submit the following poll. And if you could just give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Vertu Motors plc. Robert, good afternoon, sir.

Good afternoon, and thank you for hosting this. I'm accompanied this afternoon by our CFO, Karen Anderson, and you can see the slides. So we'll make a start -- we'll keep this to an hour, so we will finish [ whenever ] possible. So next slide. The investment case of Vertu Motors, I think, is very clear. We are the only major quoted player in the U.K. franchise retailer space, which used to have a lot of quoted PLCs. Our long-term investment case, I think, remains very sound and reflects our strong strategic position. We are 1 of 6 supergroups with turnover in excess of GBP 4 billion operating in the U.K. franchise dealer space. We've got the widest geographic coverage and the widest manufacturer footprint in the U.K. and have around 5% of the U.K. car market. We're also very strong in vans with a similar market share. The scale that we've got, we employ around 7,800 people, gives us very strong IT, in-house capabilities, marketing capabilities, and we have a business model that allows us to deliver scale economies. The jewel in the crown of our business is the high-margin aftersales business. Built on a database of 2 million customers with high levels of customer experience and very long-term retention strategies, making that high-margin revenue stream very resilient. We have a culture of focusing on the controllables. And clearly, in the last 12 months, that came to the fore. We have a history of strong execution. We've moved in the last 3 months to a single brand. So all our dealerships, but our Ferrari operation, is branded Vertu, and we expect that to deliver around GBP 5 million of medium-term savings. And we've also introduced, post the budget, a cost reduction program, which more than offset the costs imposed by Rachel Reeves on the business from April onwards. We've got a strong focus on capital allocation. We're constantly reviewing our portfolio of dealerships. Have we got the right franchises? Are they delivering the right returns? And then move capital from low-performing return dealerships through closure programs to investing in new higher return activities. Our share price is clearly below our tangible net asset value of 72.9p, and we've had a significant share buyback program in place for a number of years. We bought in excess of 17% of the equity of the group back, and we expect that to continue. In terms of the highlights of the period, this was, I think, a creditable performance given the major sector headwinds that the sector faced in the new car market. It is clearly very disappointing to see profits fall, which were as a result of the government's Zero Emission Vehicle Mandate, which disrupted significantly the new car market, as you will see. The business itself actually operationally performed well. We took market share in new retail cars, and we grew profit in used and aftersales. It was the new car market that created the positive -- the profit backtrack. There were a number of other positives. Our margin rose overall due to the higher aftersales mix. We have an excellent H2 cash generation, which beat consensus net debt numbers quite significantly. And as I say, our proactive actions around cost reduction and the share buyback, I think, have been well taken by investors. We've additionally made a strong start to the new financial year, and there's more details here. You can see our gross profit at the core group has increased by GBP 2.5 million in March and April, and our trading profits were up in that same period, which is a good start to the new year. We saw strong growth in the new retail volumes, particularly in March. The market for new retail is actually at a 25-year low in 2024. The sector sold fewer new retail cars than during COVID when most of the time we were shut. Clearly, that is now coming back, which is good to see. And in March, particularly, we earned very high levels of bonuses from our manufacturers. You can still see though on the profit bridge that new vehicle gross profit generation actually dipped slightly on a like-for-like basis. This was due to the 22% fall in the motability volumes, which reflected weaker national volumes and some mix impacts. Fleet and commercials, which is a very strong part of our business. We're the leading player in fleet and vans in the country. So overall strong growth, returning volumes, and it's good to see vans starting to outperform what is now a weaker market. Used cars generated higher profit in the core group. Used cars are a very important profit stream for us. We were up GBP 0.9 million, and that's due to higher margins. We've had very strong control of stocks, very good stock return and reduced discounting. The engine room of our profitability is clearly aftersales. And you can see yet again in the 2-month period, a GBP 2.1 million improvement in core gross profit based on 6.1% service revenue growth on a like-for-like basis. So a good start. Where do we go from here? Well, I think the growth in the new retail car market bodes well for the rest of the year. We've got lower interest rates, which should help us. The zero-emission mandate, which caused so much damage last year has been moderated, though it's unclear how much that moderation is in place because the full technical details of the changes are broadly unknown. There still remains the risk of discounting and rationing of petrol and diesel cars going forward, but any moderation is to be applauded. It is quite clear, though, just to put into context that the battery electric vehicle target mix for this year set by the government is 28%. I can categorically state that will not be achieved. I think the industry is running around 21%, and I can't see that getting much better. Aftersales remains in very resilient growth mode and used cars are seeing stability in pricing due to continued supply constraints due to the cars that were never sold during the COVID period. Demand is pretty solid, but margins are on the move. And I think customer demand should be helped in both new and used cars by the lower interest rates. One flag we have made is that battery electric vehicle residuals of de-fleeted contracts from, say, 3 years ago are likely to see pressure on those residual values, both as a result of the increased supply and also the technological advancement in the intervening 3 years. We will continue to focus on the controllables. Last year's acquisitions and start-ups, which negatively contributed should move to profitability. Clearly, we're going to gain the benefit of the strong cost control we've had. And capital allocation will remain critical. We will evaluate and undertake acquisitions where they meet our hurdle rates, recognizing the sector uncertainty. We have substantially reduced capital expenditure in the forthcoming year, and we will continue clearly to balance dividends and buybacks. If we turn to our strategy, our strategy is very clear and has been very consistent. We're just quite keen on speeding it up. In terms of growth, the strategy is to grow the scale of the business, but also to ensure that our future manufacturer portfolio actually reflects the future shape of U.K. automotive. And clearly, that will need some degree of Chinese component as we'll go through later on. There's no doubt that sector headwinds will create growth opportunities. In terms of digitalization, we have 60 in-house software and technology developers, and it's critical in terms of delivering the customer experience, but also in driving sales, but it's equally critical in controlling costs. And we've got plans very much set out to make further efficiencies to our business in the next few months. The business is fundamentally a people business. We sell to people and the experience is delivered by people. Our customer experience scores are excellent, and our colleague satisfaction scores are strong despite the fact we've gone through a rationalization process over the last few months. We are attractive as a sector player and a lot of our competitors have been subject to takeovers and integrations, and that instability is making us able to recruit some top-class people. So if we take a deeper look at some of the sector trends, there are 3 highlighted here. We've not put agency, which is where manufacturers directly invoice customers, down here because we don't really see that as a major risk going forward. And in fact, a number of manufacturers have been pulling away from agency. If we take electrification, the zero-emission mandate, which was so difficult for the industry to deal with because of the high targets and the worst finding mechanism in the Western world produced the worst market in 25 years for new retail cars and a discounting environment where the manufacturers actually spent GBP 4.5 billion last year discounting electric vehicles. The government have responded. There are unspecified flexibilities, which I think the manufacturers have welcomed. So hopefully, this year will be less affected by the zero-emission mandate. It is, however, still an uncertainty. There is no chance of hitting 28% this year, and this will -- the latest moderation will be one of a number of retreats from this government policy over the next 5 to 10 years. If we turn to tariffs and Chinese entrants, and I think the 2 things are linked. There is clearly uncertainty as to how the U.K. automotive sector will be impacted by the global Trump tariffs of 25%. Luckily now, we've got the U.K. with its trade deal of a 10% tariff. I think we're the only country where the automotive tariff is 10%. That takes a lot of pressure off U.K. manufacturing is to be much welcomed. However, there is always the risk that manufacturers in Europe or Asia, who have to potentially bring down their level of exports to the U.S., move some of that excess supply into the U.K., and that could lead to margin pressure. That's certainly one to watch. Turning to China. There's no doubt that the Chinese market overproduces cars compared to domestic demand. They're now switching their focus to export and the cars, particularly electric vehicles, but also hybrids are absolutely excellent product and are making swift market share gains across the globe, including in the U.K. We partner with Geely, we partner with MG, and we're increasingly partnering with BYD, and we're seeing the BYD in particular, taking significant share. There is always the potential for geopolitical changes and even tariffs to come into play to actually reduce the effectiveness of new Chinese brands coming into the U.K. For example, President Biden put 100% tariff on electric vehicles in China in the U.S. The EU have got tariffs of up to 48%. We're currently at 10%. That may change. And clearly, we'd have to take account of that and certainly take account of that risk. We are the only major Western market that doesn't have significant tariffs on Chinese electric vehicles. So we will be increasing our exposure to Chinese brands in the months and the years ahead. If we turn to finance commission, you'll see much in the press about these issues around regulation. The FCA are reviewing discretionary commission arrangements, but they said they will not report until the Supreme Court has concluded on its review of the Court of Appeal decision in October, November to actually impose a fiduciary duty retrospectively with regards to credit broking, and we are a credit broker under FCA regulation. We would anticipate that the Supreme Court would in the summer this year, actually probably overturn that Court of Appeal decision. The hearing has now been heard, and then the FCA will decide how it deals with discretionary commission arrangements. The Board doesn't consider at the current time that we need to make provisions in relation to any of these exposures, and we'll keep shareholders updated. If we turn to digitalization efficiency and AI, finance efficiency and making our back offices and administration processes more efficient has been on the agenda for a number of years, and we made big strides actually, particularly coming out of COVID. We're now going again on this. Our 60 technology developers are working very hard in this area. For example, reducing the number of invoices that need manual processing. We've got a smart repair business that works internally. It sends 30,000 invoices to the dealerships. We're piloting a system where that's all completely automated, including cash payment. Transfer of used vehicles from one dealership to another, all now completely automated from an administration and a cash point of view. These are important because we can make further cost savings. If we take the middle block of data and AI, we have got an AI algorithm, which calculates both trade and retail price of every used car in stock and in the U.K. every day. We reprice about 70% of our used cars daily. So they are at the right price. Prices can go up as well as down. And what we've looked at there is if we've got the value of the car right on the Internet is at the right price, why are we still discounting used cars? And you can see that up to September, we were discounting around 80% of our used cars. So we've got it at the right price, and we're still giving money off. We've managed to reduce that down to 50% of used cars with a discount. The way we did that was using automated alerts. So if a car has a discount of over GBP 500, it goes to operations director. If the discount is over GBP 1,000, it comes directly to me. And you can see the impact, we've made that solid reduction in discounting, which has augmented our margin. The final element we've done a lot of work on. We've got a very, very good data warehouse where all our data now sits that interacts with our customer data platform. And we are increasingly using that to drive digital marketing and to make general efficiencies in how we operate. As an example, we've reduced our Google pay-per-click spend by around 3% over the last few months by using the customer data platform to tell Google who's bought a car recently and not sending them a further Google pay-per-click ad, which we have to pay for. Finally, in the strategy section on brand and marketing, we announced to our shareholders last October when we did our interims that we would be rebranding from tree brands to one. Around half of the group was branded Vertu and the rest were Macklin Motors and Bristol Street Motors. And we achieved the final switchover in April. So we are now one brand as a retail group. That's one website, for example. Much more simple for us to operate, and that allows us to take some cost savings. It also increases the effectiveness of our marketing. So for example, in sponsoring the EFL Trophy at Wembley under the Vertu brand, that now affects 200 dealerships as opposed to 90 or so 12 months ago. So getting a much bigger bang for our buck. And it also allows us to do nationwide TV campaigns to promote the dealerships and get the full benefit of that. So I'd now like to turn to Karen to review the financial performance.

Thank you, Robert. If we start here on the income statement, you can see that revenues increased year-on-year, and all of that growth is attributed to acquisitions. Revenues in the core group actually saw a small decline due to lower new retail vehicle volumes. Gross margin improved slightly to 11.2%, and that's due to the increased mix of our higher-margin aftersales revenues. Costs grew as a percentage of revenue, reflecting the cost pressures in the period and also reflecting acquisitions and new business start-ups, which have a higher ratio of expenses as a percentage of revenues. Adjusted operating profit reduced year-on-year, driven by the reduction in profitability from the new car channel, which I'll highlight shortly on the profit bridge. And this reduction is flowing through to EPS and dividends per share. We saw an increase in the group's interest costs compared to last year. We've got manufacturer stocking charges making up GBP 0.9 million of this increase as pipelines extended with the new car market. And interest on lease liabilities also increased due to leases acquired in the period or lease extensions negotiated in the period. We've got some non-underlying costs, which represent the cost of the group's reorganization and redundancy costs as we worked hard to offset the impact of the Autumn Budget in advance of the new financial year. If we turn over the page to the profit bridge, core group gross profit increased by GBP 7 million over the prior year, and that's really been driven by that strong performance from aftersales. But clearly, the standout negative in gross profit generation terms is a GBP 10.9 million reduction in gross profit from the sale of new vehicles. And this was driven by the lowest U.K. retail market in 25 years, which Robert has mentioned, along with significant discounting by manufacturers of battery electric vehicles and striving to hit government targets and that really impacted particularly in quarter 4 in their ability to support and pay bonuses to the dealer network. Offsetting the shortfall was a highly improved gross profit generation from aftersales, as I said, and also from improved gross profit generation from used cars. You can see also the impact of the cost pressures in the period where core group gross -- costs increased by GBP 10 million. I've already covered the finance costs on the previous slide, but you can also see a year-on-year reduction in profitability related to acquisitions and start-ups. And this was expected given the biggest acquisition that the group made was made in October. And so that missed out in terms of the [indiscernible] change months. Turning to management cost headwinds. You can see on this slide that the core group saw GBP 10 million increase, that was the one shown on the profit bridge, a rise of 2.2%. Now we were delighted this was below the rate of inflation over the same period. Clearly, the biggest single cost of the group is the cost of its people. We are a people business. And actually more so when you realize that this salary cost here does not include the productive cost of technicians because they are within cost of sales. Salary costs rose GBP 11.6 million over the year with GBP 8 million of this increase arising in the first half. That rate of growth moderated to an increase of GBP 3.7 million in the second half, and that's reflective of the early action we took in response to the budget in terms of cost savings. Looking at the total increase on the year, about GBP 6 million can be attributed to the rise in National Minimum Wage back in April 2024 and the knock-on impact in terms of maintaining differentials for some skilled colleagues. Approximately a further GBP 4 million of the increase, which all arose in the first half related to increased headcount as the group was successful in reducing outstanding vacancy levels. One of the greatest percentage variances in cost terms is in vehicle and valeting costs. And this is the cost of the group's courtesy and demonstrator fleet in particular, where we saw higher levels of demonstrator and courtesy cars with higher prices because they now include more battery electric vehicles, which are generally more expensive. And the group applied increased depreciation rates, particularly to battery electric vehicles to make sure that at the end of demonstrator period, they hit used car stock for sale at the right value. Countering some of these cost increases was a significant saving delivered in marketing costs. The group rightsized its marketing activity in response to the reduced new car retail market and also as a result of our used car pricing algorithm, which Robert covered, which meant that there was less requirement for used car sale events. If we turn over to the balance sheet, the group's balance sheet is very stable and strong, underpinned by a strong freehold and long leasehold property portfolio at GBP 331 million, which is carried at historic depreciated costs. The increase in current assets relate predominantly to the movement in inventory. New vehicle pipeline inventory, the majority of which is funded by our manufacturer partners did increase as the market fell and pipelines extended. The group, however, has been successful in reducing the level of demonstrator and courtesy vehicles at balance sheet date in response obviously to those rising vehicle costs have just gone through. Used vehicle inventory increased by GBP 3.3 million in the total group. However, this was a result of acquisitions. And in the core group, we successfully held inventory at lower levels and saw a reduction despite higher average selling prices. Tangible net assets per share, as Robert mentioned, 72.9p per share. This clearly reflects the strong asset backing of the group. And actually, this was increased on last year's level as a result of the share buyback program as you can see, tangible net assets were broadly unchanged year-on-year. If we turn to the group's cash flows, the group generated a free cash inflow of GBP 37.3 million in the year. This was aided by a GBP 7 million inflow from working capital compared to last February. And the main elements of this were GBP 6.2 million cash inflow in reductions in used vehicle stock and the demonstrators, a GBP 2.1 million cash inflow from holdings -- reduced holdings that are fully paid, so not funded by the manufacturer on our own balance sheet, fully paid new vehicles and some other cash inflows of GBP 1.5 million. These inflows were partially offset by a small GBP 2.8 million increase in debtors, and that's the result of the investment in the group's Pay Later product, which has helped drive improved aftersales performance. This minimum bad debt experience is -- reduced cost to the group compared to the previous third-party provider for us and therefore, has a strong return on investment. Sustaining capital expenditure of about GBP 15 million was spent in the period with this partially offset by proceeds from the sale of surplus property of GBP 5.6 million. We spent a further GBP 12.1 million on capital projects that expand the capacity of the group, such as the new Toyota dealership in Ayr as well as on acquisition -- in terms of acquisition. Net debt at the end of the period was GBP 66.6 million, excluding lease liabilities and that represented a GBP 12.6 million increase on FY '24 despite GBP 22.4 million on the Burrows acquisition in terms of both the cash consideration we paid and the debt that we assumed on that acquisition. If I turn over to the next slide in terms of property portfolio development, one of the group's strategic objectives of growth. And if we look at the activity during the year, I've already mentioned the Burrows acquisition, which was 8 outlets, including 5 Toyota. We also made 2 smaller acquisitions both in the period and immediately after the year-end, a Honda business in the Southwest and also Union Motor Company Limited, which augments our LEVC business such as we now have coordinated sales and aftersales for LEVC across Scotland. We saw a number of start-up operations in the year listed and explained on this slide. But you'll notice on the profit bridge, we obviously saw profits go backwards as a result of acquisitions and start-ups. And that's because start-up operations take time to mature and generate profits, [ for ] the startup year being typified by high marketing costs, a low customer database and low aftersales absorption. As the business matures, clearly, the database builds, our aftersales absorption improves. And so therefore, it's not uncommon for businesses like these to have start-up losses in the initial year of operation. The group has a pipeline of potential acquisitions, which we assess using strict investment metrics to ensure that the expected return on capital on these acquisitions will exceed the group's weighted average cost of capital. In terms of other elements of capital allocation, clearly, we want to grow, but also, we want to make sure that we've got a well -- portfolio, which gives us the required level of return. And we have an exercise called pruning where we look at our existing portfolio and identify assets that are not generating the required levels of return. Clearly, there are a number of reasons why this might be the case. It might be management, it might be the franchise. But if we exhaust all of the opportunities, we'll then look to potentially close the business, and we've closed 2 businesses in the year. That's allowed us to recycle both the working capital absorbed in these businesses and sell the freehold in order to free up cash to reinvest in better-return assets. The group has a share buyback program in place since financial year '18. And actually, we've spent -- we actually bought back over 17% of the group shares since that date. We announced GBP 12 million share buyback in February and to the end of April, we spent GBP 2.2 million of those, leaving GBP 9.8 million for the rest of FY '26. We've also purchased some shares into the employee benefit trust in the year. And finally, in terms of dividend, we think that's also an important element of shareholder return. And in total, we paid GBP 59 million in dividends since we started paying. The final dividend of 1.15p per share, bringing the full year dividend to 2.05p per share is in line with our stated dividend cover policy of diluted EPS of 2.5 to 3.5x.

Okay. Thank you, Karen. We're now going to go through more of the trading and operational update, take -- looking at each of the revenue streams in turn and seeing how those trends have been. If we look at vehicle sales performance, you can see we split how we think about the business between the new retail market, the motability market, fleet car, new commercial vans and then used. Used is split between retail where we sell to customers and trade where we predominantly sell those cars through to British car auctions. So the big story, as Karen showed you on the profit bridge, was the declining market in new retail car sales. Now the market was already 20% lower than pre-COVID, but the impact of the zero-emission mandate had a very significant impact. The impact was actually -- mainly actually on the manufacturers who bore the brunt of it with significant margin pressure. I've already referred to the GBP 4.5 billion estimated discounts according to SMMT, which the manufacturers gave. So we not only -- we find margins under pressure due to that forcing of battery electric vehicle supply into the U.K., but also reduced manufacturer support because the manufacturers were really struggling with the dynamics of the market. They were having to discount heavily the battery electric vehicles, and they were having to ration the petrol and diesel products on which they were making very, very good margins. That is not good either for them or indeed, there's a knock-on effect in terms of our profitability. There was an increased mix of the lower-margin motability business. As you could see that the volumes like-for-like was stable in motability, but down in new retail, and that also diluted our margin. So overall, a GBP 10.9 million gross profit reduction in the core, which was clearly painful. Having said that, we gained market share. You can see we beat the new retail market with -- on a like-for-like basis. And as you'll see in a moment, we absolutely murdered the battery electric vehicle market. The way that the manufacturers sought to try and avoid fines, try and hit the target was in the channels of fleet and motability, and that saw much more buoyant growth than in the retail channel, but it came at a cost because it needs much higher discounts from the manufacturers, putting pressure on the manufacturers' profitability. In terms of motability, we saw growth in H1. We saw that go into reverse in H2. We think this is the renewal timing. During COVID, there was no supply to motability, then there was a big burst of supply. And over the last 18 months, we've been renewing that bubble as it were in terms of renewals, which is now tempered down. We are also actually losing some share because Ford and Vauxhall, who were particularly strong historically are pulling back in terms of their product availability and share of motability. So we've lost some share there. In terms of fleet and commercial, we do not enter into massive amounts of supply into the daily rental market. Some of it is actually done direct by manufacturers. It is very, very low margin and is not something we prioritize. We want a profitable fleet business. So we've seen an increase in the market in supply to daily rental. That shows you this is a push market with oversupply compared to retail demand. But our margins have been stable, and we've seen significant growth in fleet cars, which we are pleased with. We are the largest operator in fleet. Profit overall has been stable. In used cars, we're delighted GBP 5.7 million rise in profits year-on-year like-for-like as prices stabilized after its wobbles in quarter 4 calendar -- in 2023, and we've seen robust trade prices. There is fundamentally a lack of used cars in the U.K. It is perfectly explainable. There was a lack of new cars sold in 2020 to 2021. There was about 3.6 million missing cars, and that means that used car prices should be robust. Demand was, I think, steady. I don't think we saw margins expand the extent to which we expected them to because the demand was steady rather than growing. We clearly had issues around consumer confidence, interest rates and substitution into new. As the pressure came on the new car market, and we got cheap finance rates from the manufacturers on new car offers and discounting, particularly on battery electric vehicles, there was a switching from used into new. We look particularly at the used vehicle BEV market, I think there's some interesting statistics here. You can see that the private battery electric vehicle market in the U.K. actually grew by 12.9%. We actually grew our like-for-like battery electric vehicle sales by 83%, which given the fact we've got 5% of the market is quite some achievement. We were certainly held by some of our manufacturers who prioritized battery electric vehicle sales with some fantastic offers. For example, we are the largest player in the U.K. with Honda and the e:Ny1 had some phenomenal offers and became the -- I think it was the biggest selling electric vehicle in both March and September. If you look at the bottom right, though, this is the story of the new car market last year. You can see the percentage of battery electric vehicles by registration type. And bear in mind, the target was 22%. So in private retail, only 10.7% mix; in motability, 17%; and then in fleet, 30%. So clearly, that's why the fleet market took off compared to retail because the manufacturers and ourselves were constrained about trying to avoid -- the manufacturers trying to avoid fines and the fleet market was the go-to market, both for corporates, company car drivers with tax advantages and the rise of salary sacrifice schemes, again, due to tax advantages. There are no fiscal incentives for private customers to buy battery electric vehicles. In fact, from the 1st of April, vehicle excise duty on electric vehicles actually went up. So we were pleased that we beat the market. We were particularly pleased that 2 of our dealerships led their franchise in battery electric vehicle sales being Hereford Volkswagen and York MINI. You've seen in the profit bridge that aftersales significantly increased its core gross profit like-for-like, GBP 12.3 million increase. This is a high-margin, resilient business that has good growth prospects. All major segments grew. We have a very strong customer base with 160,000 people with service plans, meaning they are coming back and 48,000 motability customers who are definitely coming back. You can see revenue growth across the piece, and you can see margins pretty strong, a bit of weakness in parts due to increased warranty mix there, but strong margins coming out of aftersales. We dig a bit deeper into service. The -- we were reporting a couple of years ago shortage of technicians that was constraining our growth. We have significantly improved the number of technicians in the core business. Our competitors have closed quite a number of dealerships that's freed up technician resource, which we've taken advantage of. And we've enhanced our pay in the past 18 months, which has also helped. So you can see the core business has got far more resource. This is about selling hours. In terms of retention, the depressed new vehicle market means the park of about 32 million vehicles is aging. The average age of a car into our service department is now 4.93 years. And 50% of our used car sales go out with a service plan where the customer is then committed to come back for a service cost effectively for around 3 years. Karen referred to the Pay Later product. This is helping to drive significant growth within aftersales. So a car comes in, we do a vehicle health check, we identify work that is either needed to be done today for safety reasons or in the next 6 months. We then bring the customer, get an agreement, and we allow deferred payment on a 0% basis for 3 months to help with the conversion, and that is driving an improvement in average invoice value. Average invoice values in service were up 8%. We're also using relatively sophisticated marketing. We're using behavioral psychology specialists on how to market on the Internet and in a lot of e-mail CRM mailings to drive sales. Our summer and winter checks have grown considerably using those techniques. And we sell a lot of tires. We've got the franchise dealer network and us in particular, have been very good at selling tires. And again, we -- I think last year, we delivered a 14% increase. This year, we've delivered a 12% like-for-like increase in tires. So in summary, we feel we've got a lot to do to improve the business. It is a very large business. Myself and Karen and our COO founded the business 19 years ago. We have a very, very stable management team that hopefully has gained some experience in those 19 years. We've got, as you can see from the balance sheet, a very well-capitalized asset-backed business with the firepower to expand further. Scale is important, both in terms of manufacturer arrangements and in terms of being able to fund modern marketing and technology. That digitalization area is of supreme importance both in terms of making it easy for customers to deal with us, but also for reducing cost and increasing efficiency, and there is a myriad of work required in that area. We are, though, a people business. The people will never be replaced by technology. The technology will enable the colleagues to be more efficient and to serve customers better. And we're very proud of the culture that we've got, which is definitely a meritocracy where people can come in, train hard, work hard, thrive and have fantastic long-term careers. We are clearly also focused as a business on capital allocation, and that will continue as we strive to deliver shareholder returns. So that is the end of the presentation. I'm pleased to see there are some questions here, and I'm also pleased to see they're not all directed at me.

So Karen, the first question comes from Ben S. And it's a good question. 2026 forecast show an increase in revenue but a decline in EBITDA and PBT. What are the main reasons for this forecasted decline?

Yes. The turmoil in the new car market was really the reason for that forecast decline. The ZEV mandate requirement for 2025 was -- sorry, 2024 was 22% mix. That mix was going up. The behavior that the manufacturers have exhibited in terms of big discounting impacting on our margin in the face of a rise in that share meant that we were very cautious in terms of new car profitability going into next year. So it might be that we had to drive revenue forward to achieve these targets in terms of ZEV mix, but at reduced margins.

I think it's fair to say that the turmoil in the market meant we were cautious, wasn't it, in setting forecast for the current financial year FY '26. It assumed that the ZEV vehicle mandate would be worse or certainly a continuation of the issues. And I think 2 months in, we're probably -- we clearly traded ahead, but we haven't changed those forecasts. So we'd hope that they will be set on the conservative side. Okay. Next one is also for you from Leo. Interest-bearing new car consignment stock has doubled as a percentage of new car stock over the last 2 years. What is the advantage of this form of financing over using your bank facilities or cash?

Okay. So interest-bearing consignment stock is not the only stock that the manufacturer funds. So if you got [ answer ] that -- excuse me, you'll also see there's some stock invoice not yet paid, held by manufacturers to the order of the group. Where the funding -- where the inventory sits depends on the franchise. So franchise mix will play into the part of interest-bearing consignment stock. For example, Honda use consignment stocking so the more Honda dealerships are now [ upgrading ] that number. The advantages of using manufacturer funding is that the manufacturer then sees the stock in the pipeline. In some cases, it means that actually stock -- if you think about the likes of Ford and some others, they do invoice [indiscernible] those vehicles might not be physically present with us. They are usually visible to the dealer network and others can actually then asked to be able to sell...

So if you take it off manufacturer funding, fundamentally, the dealer network loses visibility, and we might sell it.

So visibility -- so the advantage is visibility. Second advantage is that then a lot of the obviously interest-bearing consignment stock, we only bring on balance sheet when its [ bears ] interest. But the other category, which is stock invoice might have a significantly long interest-free period as well. And in some cases, we actually get a stocking credit too upfront and then obviously, that's to offset any future charges. So it keeps the visibility there. It keeps the relationship with the manufacturer there. And we have to do our best to manage the costs when those cars become interest-bearing. And yes, we can use, in some cases, the strength of our balance sheet to buy stock in order to avoid interest charges where we think it's advantageous.

But we do try our best to negotiate the best finance rates with the manufacturers as well to try and keep a limit on that. Okay. The next question, I think, is for me. So from Leo, how do your traditional OEM partners feel about multi-franchising, especially sharing sites with new Chinese entrants? Are there more restrictions where their finance arm has provided a mortgage? Right. The first point I'll deal with is the second point. The answer is there are no linkages whatsoever between manufacturers providing us with mortgage finance and what we can use those dealerships for. In fact, some of the -- a lot of the mortgage finance we've got from manufacturer partners, which are 20-year mortgages are on completely different franchises than that manufacturer provides. So that isn't relevant. The first part of the question is actually a very good question. How do your traditional OEM partners feel about multi-franchising? Well, let's deal with that one first. There are rules around multi-franchising. So for example, I did have a manufacturer write to me to say they needed separate toilets today because they didn't want to have the customers going into -- through a door into another showroom to go to the toilet. So there are definitive rules around that. However, I think manufacturers over the last few years have absolutely recognized that with the increasing costs in the U.K. and the pressure on margin, particularly around new vehicles and ZEV mandate that actually multi-franchising helps them maintain the economics of a network. So I think there's a balance there, but broadly, manufacturers are positive, some more positive than others. Sharing with new Chinese entrants, clearly, that is a point of some debate. And some people are more keen on sharing than others. And it is pertinent. Certainly a lot of rules around separation, et cetera, et cetera. So it's a very good question. And it is one that we have to weave our way through because the traditional manufacturers are clearly in some cases and in most cases, in fairness, quite worried about losing share to the Chinese, which is, in my opinion, going to happen. Okay. I like the next question. The next question is the best question I've seen in a long, long time, actually. Ben S., it's a long question, but it's a good one, so it's worth going through. Imagine a significant unforeseen disruption to our industry. Well, let's be honest, that never happens, does it? In the next 5 years -- never happens. Something beyond the typical cyclical changes or technological advancements. I was actually talking to an institutional shareholder earlier. I joined the industry in 2001. And the shareholder asked me when we will return, if ever, to normal? And I said this industry has never been normal. In 2001, in my first institutional presentation as Finance Director of Reg Vardy, we were discussing a catastrophic decline in profitability in the new car department due to a buyers' strike because of differential new car pricing between Europe and Treasure Island or Britain. So there's always been a number of different things going on. But the question says, what is the single most critical capability or cultural trait within this organization that you believe will allow you not just to survive but potentially thrive in that new landscape? And how are you actively fostering that capability or trait, which is a d*** good question. The first thing I would say, it's multilayered, is we have a very, very experienced team. Now the executive team have been at the helm of the group for 19 years and had automotive experience prior to that. So I think that should give investors some comfort that hopefully, we know what we're doing. And I think that is absolutely paramount. But I would then go on to say that our operational directors and indeed, our general managers are well seasoned. And this is not a business or a sector that has had 40 years of stability and has suddenly been sideswiped by change. There have always been change. If you think back, it's had the Japanese arrive, the Koreans arrive, it's had global financial crises. It's had COVID, it's had supply constraints due to Ukrainian factories getting bombed. It's had Brexit. I mean there's been quite a lot going on, actually. So we're quite used to having to think about change. Now I think from the word culture is in the question, and I think that's useful. So we do have a culture of keeping very close to what's actually going on at the coalface as opposed to trying to run everything from Gateshead. I spent most of my life traveling around dealerships. We have an operational director meeting once a week at half 8 on a Friday morning for 2 hours, which keeps us all very close to what's going on and allows us to make sure we're quite agile in terms of how we go to market, which I think is important. We fundamentally believe, I think, in the tenets of Stoic philosophy, which is there is absolutely no point getting stressed by things that either have not happened yet or have happened, but you've got no control over. It is a pointless exercise. I mean, Benjamin Franklin, his favorite quote, wasn't it, around I've had many problems in my life and some of them have even happened. And I think that's quite pertinent. You can worry about a lot of things, but most things don't happen. And we have got quite good at thinking, right, this has happened. Now what do we do next? When clearly the ZEV mandate came in, and you might think this is ridiculous, but I actually asked all our seasoned operators to watch Rogue Heroes SAS because I quite like the way that there were -- every obstacle was overcome and there was always a way of finding a way. And even in the worst circumstances, the idea was to find the right opportunity from there. So hopefully, that gives you a bit of a feel of how we think about that. It is a very good question and one that goes to the heart of how we try and run the group, which is what is the next best thing to do from here? There is no point getting upset when things don't go quite as we planned because they largely never do.

I have 3 words, experience, execution and energy.

Okay. The next one, I think, is for me. BYD have said they aim to become the #1 U.K. car brand within 3 years and have opened at least 3 new sites this week. Cannibalization of sales from European OEMs seems inevitable as does pressure to introduce tariffs. How can you balance the risk of being overexposed to BYD? I would open it out a little bit more. It's not just BYD, it's generally to Chinese electric vehicle manufacturers. And I think your question probably almost answers itself, which is there is no right or wrong way here in terms of you've got to make a judgment. And you're quite right. At the moment, we've got 10% tariffs with regards to Chinese. At some point, that could be 50%. At some point, that could be 100%. So there is a question of balance, I think, and judgment. BYD is growing at a fast rate. It is clearly taking market share, as you say, from European OEMs. Do I personally believe they will be #1 car brand within 3 years? I think it's probably unlikely actually. Will they be a significant manufacturer in the U.K.? I think in the absence of tariffs or some other geopolitical event, I think it's quite likely. So have we got a close relationship with BYD? Yes. Are they a manufacturer producing excellent cars at affordable prices that will take share in the U.K.? Yes. It is a question of judgment as to whether we're going to be under or overexposed, and we will only know in hindsight, I suspect. Right. You own a considerable amount of real estate, GBP 330 million worth to be precise. What is the estate proportion of the reported NAV? Well, you can work that out you because GBP 330 million is well over 100% of the net assets -- tangible net assets. Are there any plans to reduce debt by way of estate sales? Or is the company comfortable maintaining assets? I think there's 2 aspects to this. There's the operational property answer and there's the finance answer. From an operational property answer, I think motor retailers are best run from freehold dealerships because if you need to make a change, and let's be fair, we're in a period of transformation and change, it's far easier to sell a freehold than it is to get rid of the leased premises. So I think there's good operational reasons. And in my opinion, the best, most successful automotive retailers of the past 40 years were Arnold Clark, still probably the best, massive freehold property portfolio. Reg Vardy Plc, massive freehold property portfolio, which was subsequently sale and leaseback by Pendragon, not a good effect. And C D Bramall, great property portfolio, again, sale and leaseback by Pendragon. I think that the sale and leaseback Propco/Opco strategy is fraught with danger. And I personally wouldn't support a use of that to pay back debt. Our gearing is 19%. So I don't necessarily see that as something we need. But any comments, Karen?

Actually, we -- really a significant portion of our debt is actually long-term mortgage money secured by that property. So actually, I'm quite comfortable that we've got the assets, and we can...

I think we would say, though, if a property isn't delivering a return on capital employed in excess of weighted average cost of capital, then we should sell it.

Yes.

Right. Okay. The next one is on Pay Later. So the average value of our sales invoices under the umbrella of the Pay Later scheme seems to be much higher than otherwise. So what's led to Vertu's decision to start making loans to customers itself? This marks a deviation from the core business and involves a degree of credit risk. What is being done to mitigate the credit risk? I would just say relax. So the reason why the average value of aftersales invoices under the umbrella of Pay Later is in excess of the average invoice value generally is because we do not fund somebody who comes in for a service to, say, GBP 300, that can't be funded on Pay later. Pay later is where somebody comes in, it's a GBP 250 service, there's GBP 300 of brake disc and pads, then that whole amount can be funded over 3 months interest-free. This has -- actually, most of the industry does that through an external third party, where they are -- where they then pay a percentage of the invoice to the third party. The decision for bringing it in was we realized that there are a lot of negatives about doing it at third party. There is a profit margin you're losing. And we think we have developed a system that is better from a technological point of view that does actually measure the credit risk in advance of doing it. Our history is we've had a very, very low default rate, I mean, literally 0, and we're able to offer that service to our dealerships at a lower percentage of the invoice value, which means they're more likely to use it. And the benefits of using it are we convert more work we've identified into sales, which is probably our highest margin revenue stream. So this is what is helping to drive the whole area of service and aftersales because obviously, it benefits parts as well because you sell the service work, you get the parts through. Is it a deviation from our core business because it involves a degree of credit risk? No, we have credit risk in other areas of our business. Trade parts would be a good example, fleet. So we're used to running credit risk. And clearly, our job is to make sure that we don't expose the business to that risk. This exposes the business to a credit risk, which looks like it's almost nonexistent and effectively drives our highest margin revenue stream.

We do have controls in place, so the lending amount versus the debt value of the vehicle, for example, those sorts of things. So there are controls around it.

Yes. So far, so good. And I think you've done GBP 18 million or something? Something like that so far. So it seems to work. And actually, it's so important this strategy of Pay Later that I take the 10 worst performing dealerships and I have a call at 8:30 every Saturday morning with the worst performing 10 general managers to drive Pay Later. It is very important. It's an unpopular strategy at 8:30 on a Saturday morning, but it is driving performance. So I think we have the end of the questions. I'd like to thank you for a great set of questions. Hopefully, the answers were suitably appropriate. And welcome for any feedback. Thank you very much for devoting your afternoon to this, and I've given you 5 minutes of your life back. Thank you very much.

Perfect. Robert, Karen, if I may just jump back in there, thank you very much indeed for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of Vertu Motors plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.